The value of the elasticity of substitution between labor and capital (σ) is a crucial assumption in understanding the secular decline in the labor share of income. This paper develops and implements a new strategy for estimating this crucial parameter by combining a low-pass filter with panel data to identify the low-frequency/long-run relations appropriate to production function estimation. Standard estimation methods, which do not filter out transitory variation, generate downwardly biased estimates of 40 percent to 70 percent relative to the benchmark value. Despite correcting for this bias, our preferred estimate of 0.40 is substantially below the Cobb-Douglas assumption of σ = 1.
Chirinko, Robert S., and Debdulal Mallick.
"The Substitution Elasticity, Factor Shares, and the Low-Frequency Panel Model."
American Economic Journal: Macroeconomics,
Model Construction and Estimation
Investment; Capital; Intangible Capital; Capacity
Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
Aggregate Factor Income Distribution
One, Two, and Multisector Growth Models